Starting a Holding Company
The shareholding of a Private Limited Company can be held by an individual or another Company. When the shares of a Private Limited Company or Limited Company are held by another Company, there could exist a holding company – subsidiary company relationship. In this article, we look at holding company, subsidiary company and the process for creating a holding company – subsidiary company relationship.
Holding Company
As per Company law, a company controlled by another company is called a subsidiary company and the controlling company is called a holding company. Thus “control” is used as the benchmark in company law to determine holding company status. The control can be through control of management or through ownership of shares. As per Companies Act, 2013 the world holding company is defined as a company in relation to one or more other companies, meaning a company of which such companies are subsidiary companies.
Subsidiary Company
A subsidiary company is a company in which the holding company by virtue of control – controls the composition of Board of Directors and/or by virtue of capital – exercises or controls more than one-half of the total share capital either at tis own or together with one or more of its subsidiary companies. The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power by it can appoint or remove all or a majority of the Directors.
Holding Company – Subsidiary Company Relationship
A holding company – subsidiary company relationship will be established when:
- The holding company is able to control the composition of the Board of Directors of the subsidiary company
- Holding company holds more than 50% of total share capital of the subsidiary company.
The holding company can hold shares of the subsidiary company directly or by one or more of tis subsidiary companies. Further, If holding Company A has a subsidiary Company B and subsidiary Company B has a subsidiary Company C, then subsidiary Company C will automatically become a subsidiary Company of A.
Reasons to create a Holding Company
A holding company – subsidiary company structure can be setup for a number of reasons. The following are some of the well known reasons for setting up of a holding company – subsidiary company relationship:
Ensuring Control and Unity
When a an international or domestic group of companies are setup with a holding company – subsidiary company structure, it would allow for better control over the subsidiary companies and unity among the entire group of companies.
Ease in Transfer
The ownership of subsidiary companies can be easily shared or transferred in a holding company – subsidiary company structure.
Ease of Funding
Having a holding company – subsidiary company structure would allow for the setting up of a global credit limits, thereby providing funding to small subsidiary companies at better rates.
Taxation Benefits
Based on the law of the land, there could be taxation benefits for setting up a group in a holding company – subsidiary company structure.
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